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Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 1
SAVING FOR RETIREMENT AND
INVESTING FOR GROWTH Report of the CEPS ECMI Task Force on long-term investing and retirement savings
L A U N C H O F T H E R E P O R T
B R U S S E L S , 1 8 S E P T E M B E R 2 0 1 3
D o w n l o a d a t w w w . e u r o c a p i t a l m a r k e t s . o r g / S F R o r w w w . c e p s . e u / b o o k / S F R · C o n t a c t u s a t e c m i @ c e p s . e u
Centre fo r European Po l i c y S tud ies · European Cap i ta l Marke ts Ins t i tu te · For the Report , Mi rz ha de Manue l Aramendía · Al l R ights Reserved
Karel Lannoo CEO of CEPS, General Manager of ECMI
Senior Rapporteur to the Task Force
Welcome
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 2
1. Welcome remarks – Karel Lannoo, CEO of CEPS
2. Key recommendations – Allan Polack, Task Force Chairman
3. Presentation of the report – Mirzha de Manuel, CEPS ECMI
4. Expert comments and reactions
– Nadia Calviño, Deputy Director General, DG Markt
– Patrick Hoedjes, Director of Operations, EIOPA
– Paul Woolley, London School of Economics
5. Debate and questions
Agenda
In-house expertise
2003
.... an incipient
single market
2008
.... MiFID and
UCITS effects
2012
.... the future
after the crisis
2013
.... long-term
and pensions
A v a i l a b l e f o r f r e e d o w n l o a d a t w w w . c e p s . e u a n d w w w . e u r o c a p i t a l m a r k e t s . o r g
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 3
We wish to thank…
Carmignac Gestion
– Who provided seed sponsoring for this research project
Task Force Observers
– European Commission, EIOPA, EIB, OECD, French Ministry of Ecology and Energy, Danish
FSA, Caisse des Dépôts, EurofinUse
– Numerous academics and experts who contributed to the meetings
Task Force Members
– 61 individuals, 31 companies and organisations (full list in annex to the final report)
Task Force Chairman
– Allan Polack (CEO of Nordea Asset Management) on a personal capacity
DISCLAIMER: Only the policy recommendations presented at the beginning of the report reflect the general
consensus reached by task force members (although not every member may agree with every aspect of each
recommendation). The members were given the opportunity to comment on the draft final report, but its
contents were drafted independently by CEPS ECMI and may only be attributed to the rapporteurs.
Allan Polack Chairman of the CEPS ECMI Task Force
CEO of Nordea Asset Management
Recommendations
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 4
Setting the scene
A double challenge … but common solutions? – need for long-term investments, crucial levers for growth
– and a growing pension gap, threatening inter-generational balance
A focus on beneficiaries – retail investment products: solution design (geared towards long-term investing)
– accessibility: market structure (address financial exclusion in long-term savings)
Against a complex background – public finances: fiscal crisis, high long-term liabilities
– prudential regulation: Solvency II and IORP II, among others
– monetary policy: low interest rates
– business models and product mixes: move from DB to DC
– single market: remains largely unexploited
Need for industry innovation and public steering – goal of delivering concrete proposals
1. Place households at heart of long-term investing (LTI) debate
2. Foster access to LTI solutions, including for retirement
3. Strengthen solution quality and deliver accessible market setting
4. Strengthen investor protection and optimise it for LTI
5. Continue to modernise regulation for provision of guarantees
And additional recommendations on…
Key recommendations (1/3)
E L T I F S S O L V E N C Y I I
I O R P I I P E R S O N A L P E N S I O N S
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 5
1. Place households at heart of long-term investing (LTI) debate – Households are owners or beneficiaries of 60% of financial assets in Europe
– And they face growing need to save more and more efficiently
2. Foster access to LTI solutions, including for retirement – Households need easily accessible, high-quality and cost-efficient long-term solutions
– More standardisation to raise visibility, mitigate complexity and burden of choice
3. Strengthen solution quality and deliver accessible market setting – Not only volatile market returns, poor solution design and poorly organised markets
– Single market potential should be fully exploited (processing, taxation)
4. Strengthen investor protection and optimise it for LTI – Advice can be too onerous, need for simple standardised “defaults” (under execution-only)
– Suitability should consider costs for long-term solutions, given effect of compounding
5. Continue to modernise regulation for provision of guarantees – But reconcile with long-term investing and economic reality (illiquid assets, sovereign bonds)
– Cautious approximation of capital requirements for IORPs, full account taken of diversity
Key recommendations (2/3)
Key recommendations (3/3)
E L T I F S S O L V E N C Y I I
I O R P I I P E R S O N A L P E N S I O N S
Commission ELTIF proposal valuable
But will it work for retail investors?
Need to cope with financial exclusion
Proposal on long-term balanced funds
Matching adjustment essential
Could comprise expected cash flows?
Could be reflected on capital charges?
Issue of zero charges for sovereigns
Great diversity in Europe
Security and steering mechanisms
Support qualitative approximation
Cautious quantitative approximation
Blueprint for pan-European solutions
Regulated “defaults”
Principles for solution design
Attention to processing and taxation
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 6
Mirzha de Manuel Research Fellow , CEPS ECMI
Rapporteur to the Task Force
Presentation
SAVING FOR RETIREMENT AND
INVESTING FOR GROWTH
Mirzha de Manuel Aramendía
CEPS ECMI Research Fellow
R a p p o r t e u r t o t h e T a s k F o r c e
A u t h o r o f t h e R e p o r t
D o w n l o a d a t w w w . e u r o c a p i t a l m a r k e t s . o r g / S F R o r w w w . c e p s . e u / b o o k / S F R
Mirz ha de Manue l Aramendía · Al l R ights Reserved · Contac t ec mi@ c eps .eu
PRESENTATION OF THE REPORT
Brussels, 18 September 2013
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 7
1. The issues… as we see them At macro level: need for long-term financing
At micro-level: need for long-term investing solutions
Ultimately, money from beneficiaries towards pensions
2. Mobilising household savings… in solutions that deliver
3. Guarantees play a role… but are challenged
4. DC offers opportunities… but are not immediate Need for industry drive and regulatory intervention
5. Opportunities maximised within a single market For investors to benefit from best practices and lower costs
For efficient allocation of resources and macro-economic convergence
Index
DISCLAIMER: The content of this presentation is only attributable to the author and not to Task Force members.
1 . T H E I S S U E S … A S W E S E E T H E M ( 1 / 2 )
Households are the biggest holders of financial assets
in Europe, mostly l iquid (with virtuous exceptions)
Europe needs more long-term financing and wishes to
mitigate bespoke short -termism in financial markets
Households 23 (43%)
Institutional investors
14.9 (28%)
Banks 11.9 (22%)
Others 4 (7%)
37% 21%
22% 45%
41% 21%
0%
20%
40%
60%
80%
100%
Liquidity Intermediation
(+) (+) (+) (−) (−) (−) *€ tn, McKinsey * BCG
58%
20%
64%
17% 27%
46%
0%
20%
40%
60%
80%
100%
UK Spain Holand Italy Germany France
Illiquid (private pensions and life insurance) * BCG
Share of household financial assets.... Household financial assets....
* EC
INVESTMENT
UNIVERSE
RISK
APPETITE
INVESTMENT
BELIEFS
LIABILITY
PROFILE
DECISION
MAKING
LONG-TERM
INVESTMENT
* WEF
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 8
1 . T H E I S S U E S … A S W E S E E T H E M ( 2 / 2 )
Risk aversion is on the rise – due only to macro
fundamentals or also to inadequate intermediation?
Yet, cit izens need returns to fi l l a growing pension gap
(while fiscal capacity remains l imited)
35% 37% 32%
26% 22% 28%
0%
10%
20%
30%
40%
50%
2000 2010 2000 2010 2000 2010
Currency and deposits
Shares and other equity
Insurance technical reserves
35% 38% 41%
20%
32% 36%
44%
20%
42% 43% 49%
27%
10%
20%
30%
40%
50%
… plan to favour stable deposits
… are interest in a guaranteed return
product
… perceive funds bear too much risk
… plan to move money from stocks and mutual
funds to bonds
Share of retail investors who... Year 2010 Year 2011 Year 2012
* BCG
Share of household financial assets....
* OECD
5 9.5 20.2 25.3 40.2 68.8
97.6
170.5
243.5
379
468.8
374
0
100
200
300
400
500
LT HU IE CZ RO PL IT ES FR UK DE Other
EU pension gap (€ billions per annum, retiring 2011-2051)...
* AVIVA * SG
2 . M O B I L I S I N G H O U S E H O L D S A V I N G S … I N S O L U T I O N S T H A T D E L I V E R ( 1 / 1 )
Funded pensions and other solutions do not always
deliver – low market returns but also high costs
1.83%
-1.11%
-5%
-3%
-1%
1%
3%
5% Dec 2001 - Dec 2010
Dec 2007 - Jun 2011
* OECD
Average annual real net investment return of pension funds....
Great diversity in Europe… unexploited single market potential
1.4% 1.3%
1.0% 0.9%
0.5% 0.5% 0.4% 0.4% 0.4% 0.3% 0.2%
0.1%
0.0%
0.4%
0.8%
1.2%
1.6%
Czech Rep Spain Hungary Slovenia Slovak Rep Greece Poland Netherlands Finland Norway Belgium Denmark * OECD
Operating costs as a share of total assets for pension funds....
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 9
3 . G U A R A N T E E S P L A Y A R O L E … B U T A R E C H A L L E N G E D ( 1 / 2 )
The provision of guarantees necessitates long-term
investing (ALM) but is challenged by low rates…
Fwd 23-04-13
Fwd 06-09-04
Spot 23-04-13
Spot 06-09-04
0
1
2
3
4
5
6
3 …
9 …
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
Yie
ld in
%
Residual maturity in years
4.5% 4.4%
3.8%
2.3% 2.6%
2.2%
3.1% 3.6%
2.7%
0.4%
1.7%
0.7%
0%
1%
2%
3%
4%
5%
Generali Allianz Axa
Running yield Average guarantee in force
New money yield Average new guarantee
Euro-area yield curve, illustrative spread 2004-2013.... Average and new yield vs. guarantees in life insurance....
* ECB * Morgan
Stanley
…and the uncertain impact of revised prudential standards
100%
Covered bonds (AAA, 1 year)
20%
Covered bonds (AAA, 5 years)
EEA government bonds
13%
Corporate bonds (AAA, 5 years)
EEA government bonds
1.6%
Corporate bonds (B, 5 years)
EEA government bonds
1.5%
EEA & OECD equities
EEA government bonds
* CGFS
Stylised illustration of trade-offs between asset classes, based on Solvency II standard formula under QIS 5 (charges for spread risk and equity risk only)...
3 . G U A R A N T E E S P L A Y A R O L E … B U T A R E C H A L L E N G E D ( 2 / 2 )
Contentious issues, operational constraints and
potential solutions within Solvency I I
CONTENTIOUS ISSUES
►Assets held to maturity versus
available for trading…
adjustment on the liability
side of the balance sheet
discount rate for liabilities:
matching adjustment (MA)
►Calibration of capital charges…
steepness: duration & rating
arguably inaccurate reflection
of risks in less liquid assets
► Zero risk-weights for EAA
sovereign debt…
distortion to asset allocation
OPERATIONAL CONSTRAINTS
► In applying the MA…
separate default & spread risk
eligible liabilities and assets
reinvestment & other risks
rebalancing of portfolios
best reporting format
►Calculating standard charges…
availability & quality of data
limitations embedded in
methodologies & risk metrics
► Political and economic risks…
calculation of charges
euro-area crisis & institutions
POTENTIAL SOLUTIONS
►Broader and more flexible
application of MA could…
foster long-term investment
(LTI) in assets different to bonds
but is difficult to supervise,
given discretion left to insurers
► To avoid discouraging LTI…
extended MA
interim arrangements
pending new calculations?
► Introduce macro-economic &
institutional aspects…
in the debate on LTI
In conclusion: standard capital charges and solvency ratios
are needed but emphasis should be on supervision
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 10
4 . D C O F F E R S O P P O R T U N I T I E S … B U T A R E N O T I M M E D I A T E ( 1 / 1 )
DC offers more leeway in asset al location but
incentives need to be al igned with long -term investing
Issues identified in solution design and market structure
highlight difficulties in al igning incentives
13%
52%
2% 6% 6%
15%
7% 11%
47%
1%
12%
24%
1% 4%
0%
10%
20%
30%
40%
50%
Cash and deposits
Sovereign bonds
Loans Equity UCITS / mutual f.
Unallocated insurance
Other investments
Protected DC schemes Unprotected DC schemes
* OECD
Asset allocation…
0%
20%
40%
60%
80%
100%
Defined benefit Defined contribution Hybrid
Occupational pension funds in 2011…
* EIOPA
M A R K E T S T R U C T U R E :
− Product proliferation and consumer segmentation
− Difficulties for individuals to approach the market
− Widespread financial exclusion
− Potential for abuse due to consumer captivity
− Inefficient processing architecture
− Lack of standardisation
S O L U T I O N D E S I G N :
− Unclear retirement purpose and governance
− Liquidity profile inconsistent with pension objective
− Asset allocation skewed towards short-term assets
− Inadequate or simplistic investment practices
− Unsophisticated or poor risk management
− Communications lacking behavioural purpose
5 . O P P O R T U N I T I E S M A X I M I S E D W I T H I N A S I N G L E M A R K E T ( 1 / 2 )
Single market holds potential for efficiencies, both
for headline costs and long-term investing
R² = 0.6471
0.0%
0.4%
0.8%
1.2%
1.6%
0 100,000 200,000 300,000
Ad
min
istr
ati
on
exp
en
ses
/ to
tal a
sse
ts
Total assets (GBP millions)
R² = 0.4255
0.0%
0.4%
0.8%
1.2%
1.6%
0 1,000 2,000
Total assets (EUR millions)
Scale and costs
UK DC schemes…
Scale and costs
German DC schemes…
* BCG
Single market is also an opportunity to deliver greater
accessibility and long-term investment focus
Addressing both solution design and market structure :
– tackling financial exclusion as regards long-term savings / investments
– ensuring industry delivers primarily to end investors
Delivering easily accessible default solution (s):
– no perfect solution exists, instead need to balance trade-offs
– customisation vs. cost – sophistication vs. cost – LTI vs. size – transferability vs. LTI
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 11
5 . O P P O R T U N I T I E S M A X I M I S E D W I T H I N A S I N G L E M A R K E T ( 2 / 2 )
A blueprint for pan-European personal pensions
in six building blocks
S O L U T I O N D E S I G N D E F A U L T S O L U T I O N ( S )
Principle-based rules for non-default solution (s)
Explicit consideration of retirement purpose and long-term
investment horizons and practices
Long-term absolute-return objectives (replacement rates)
Link to de-accumulation phase (annuities, draw-downs)
Product regulation of default solution (s)
Life-cycling and life-styling features or options (limited or
restricted range)
Eligible assets and permissible investment practices
Allocation range per asset class, including less-liquid assets
S O L U T I O N P R O V I D E R S I N F R A S T R U C T U R E
Resources and expertise
Alignment of incentives with l-t investment horizon
Conflicts of interest in asset management value chain
Industrial organisation and market structure policy (volume,
access to less-liquid assets classes, cost)
Pan-European processing architecture
Pan-European clearing house for default options
Administration of contributions
Unbundling of services with lower efficient scale
Uniform regulation of holding rights and transfers
C O M M U N I C A T I O N D I S T R I B U T I O N
Full fee transparency, based on harmonised fee structures
Standardised pre-contractual disclosure, supported by a
single pan-European online information point
Annual statements focused on replacement rates and
follow-up actions by members
Special suitability requirements, with broad market
coverage and explicit consideration of costs
Professional standards for sales staff
Execution-only access for default solution (s) supported by
publicly-provisioned information
In sum…
At micro-economic level, LTI depends on retail solutions – focus should be on beneficiaries and end investors
Europe is focusing on prudential rules (and rightly so) – low interest rates represent a risk to financial stability
And there is space to further align those with LTI – but supervisors will need more resources and powers
But the world is moving away from DB into DC – need for a pan-European framework for personal pensions
And pension markets are becoming quasi-markets – policy-makers need to ensure they deliver value primarily to investors (not to industry)
Where the single market potential remains unexploited – in addition to efficiencies, need for macro-economic convergence
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 12
The Report SETTING
THE SCENE
What is long-term
investing?
Investors
Asset classes
Underlying
What is the focus of the
report?
Beneficiaries
Retail investment
products
Retail long-term investing
today
Diversity in Europe
Intermediation
Liquidity
Awareness / risk aversion
Incomplete single market
C H APTER 1
Long-term investing
and retirement savings
Guarantees and
prudential rules
Institutional long-term
investing today
Diversity in guarantees
Investment practices
Prudential safeguards
Adapting to low interest
rates
Risks to financial stability
In transition to limited
guarantees
Product mixes &
business models
Awaiting regulatory change
Solvency II principles
Point of contention
Potential solutions
Lessons for IORP reform
PERSONAL
PENSIONS
C H APTER 3
Private pensions today
Market structure
Solution design
A blueprint for pan-
European pensions
Diversity in Europe
Insufficient coverage and
low contributions
High costs & low returns
Demand & supply dynamics
Scale & infrastructure
Single market potential
Shortcomings identified
Key trade-offs in design
SINGLE
MARKET
C H APTER 2
Less liquid funds
Occupational pensions
Investor protection
Direct investments
Commission ELTIF proposal
Long-term balanced funds
Accompanying market
structure
Challenges in IORP reform
Potential benefits
Recommendations
Specifics for long-term
investment products
Disclosure & sale process
Thank you!
F r e e f u l l d o w n l o a d a t
www.eurocapita lmarkets .org/SFR
o r www.ceps .eu/book/SFR
( P r i n t e d c o p i e s a v a i l a b l e f o r p u r c h a s e )
Mirz ha de Manue l Aramendía · Al l R ights Reserved · Contac t ec mi@ c eps .eu
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 13
Nadia Calviño Deputy Director General, DG Internal Market and Services
European Commission
Comments
Patrick Hoedjes Director of Operations, EIOPA
(European Insurance and Occupational Pensions Authority)
Comments
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 14
Paul Woolley Senior Fellow and Chairman of the Advisory Board
Centre for the Study of Capital Market
Dysfunctionality, London School of Economics
Comments
Debate
Nadia Calviño Deputy Director General DG Internal Market and Services
European Commission
Patrick Hoedjes Director of Operations European Insurance and
Occupational Pensions Authority
Paul Woolley Research Fellow and Chairman Centre for the Study of Capital
Market Dysfunctionality, LSE
Allan Polack CEO Nordea Asset Management
Chairman of the Task Force
Karel Lannoo CEO and General Manager CEPS ECMI
Rapporteur to the Task Force
Mirzha de Manuel Research Fellow CEPS ECMI
Author of the Report
Saving for Retirement and Investing for Growth
Report from the CEPS ECMI Task Force on ‘Long-term investing and retirement savings’
Presentation of the Report, Brussels 18 September 2013
Download at www.ceps.eu/book/SFR or www.eurocapitalmarkets.org/SFR ∙ Contact us at [email protected] ∙ All Rights Reserved 15
Good bye!
Centre fo r European Po l i c y S tud ies · European Cap i ta l Marke ts Ins t i tu te · For the Report , Mi rz ha de Manue l Aramendía · Al l R ights Reserved
Download at www.ceps.eu/book/SFR
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